Beal, Inc., a large construction firm is interested in replacing a mainframe computer with a new model. The cost of the new equipment is $1,000,000 and has an expected useful life of 10 years. The company elects to take straight-line depreciation over a five-year period for tax purposes. The equipment will have a disposal value of $100,000 at the end of its useful life. However, salvage value is ignored in computing depreciation for tax purposes. Due to increased efficiency, the company expects to save 9,000 hours per year in machine operator labor costs with the new machine. A machine operator earns $18 per hour including fringe benefits.

Presently the old mainframe computer is being carried on the books at $500,000 less

$350,000 accumulated depreciation. Currently, Beal can sell it for $50,000; however, it will have no disposal value at the end of its useful life. The minimum aftertax rate on its investments management will consider is 12 percent. The company’s income tax rate is 35 percent.

Required:

Determine whether Beal should purchase the equipment using net present value analysis.